In financial accounting, inventory refers to the raw materials, work-in-progress goods, and finished goods that a company holds for sale. It is considered as a current asset on a company’s balance sheet.
A company’s inventory can be valued in a few different ways, depending on the industry and accounting method used. The most common methods are:
- First-In, First-Out (FIFO): This method assumes that the first items added to inventory are the first items sold.
- Last-In, First-Out (LIFO): This method assumes that the last items added to inventory are the first items sold.
- Weighted Average: This method calculates the average cost of all items in inventory, and then applies that cost to all items sold.
- Specific Identification: This method uses specific identification of the exact cost of the exact item sold.
Inventories are considered as a major cost for companies, so it’s important for them to manage their inventory effectively to avoid having too much or too little on hand, which can lead to either stockouts or excess inventory.
Companies use various inventory management techniques, such as just-in-time inventory, economic order quantity, and ABC analysis to optimize the inventory level and reduce costs.
It’s important for companies to keep accurate records of their inventory levels and costs, in order to properly account for them in their financial statements and make informed business decisions.